Larger Spreads Are Good News
I think large spreads of government bond yields of southern Euro Zone countries like Greece, Italy, Spain, and
Portugal versus Germany will remain for the foreseeable future which is a good
thing. Finally, the capital markets are working again as they should by more
realistically pricing risk. Profligate politicians will be reminded that credit
has a price.
The Mirage Of Tight EMU Spreads From 1999
To 2007
If my memory serves me well
then those spreads narrowed dramatically with the introduction of the Euro in January
of 1999 and stayed within a tight range of roughly 50 basis points in the
following years until 2007. In hindsight, this was clearly unrealistic. Just
because a monetary union came into being all the risk factors that had affected
individual member countries for decades all of a sudden did not seem to matter anymore.
Incredible.
Higher Spreads Less Indebtedness
For instance, had Greece to pay a more realistic, higher interest
rates on the issue of new government bonds it probably would not have
accumulated as much debt, because Greece would have been unable to pay its
obligations.
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